Buying Braintree: David Marcus' latest bold move to make sure PayPal becomes the next gen PayPal

By Sarah Lacy , written on September 26, 2013

From The News Desk

It seems the rumors, first reported by TechCrunch, are true. PayPal has purchased Braintree for $800 million, bringing to an end a surprising rivalry in the market.

What wasn't true about those early reports -- says both Braintree CEO Bill Ready and PayPal President David Marcus -- was the idea that the company was "shopping itself." Rather, this was an asset Marcus wanted, and Ready saw that he could do more with PayPal's platform and reach than working against it.

One thing is clear: In a PayPal not run by David Marcus, this deal almost certainly wouldn't have happened. When Braintree started to surge two years ago, it was because PayPal "didn't get it" when it came to developers and customer service. Now, PayPal does. And while changing PayPal's culture and making it more innovative are easier said than done, a PayPal that at least "gets it" is a formidable opponent in a space as hard and as technical and regulated as payments.

In a pre-David Marcus PayPal, I wouldn't give much credence to Ready's insistence that he's sticking around and going to continue to build out his vision for Braintree. But Marcus has shown a knack for bringing entrepreneurs into PayPal who become members of his senior team and stick around. That is, after all, how Marcus got to PayPal -- through the acquisition of Zong, which was a quarter of the size of this deal.

It's always been impossible to untether how Braintree was doing from how PayPal was doing. Payments is a zero sum game with such strong network effects that no one should succeed against a strong incumbent. But Braintree has succeeded precisely because PayPal wasn't focused on innovating and had lousy customer service that culminated in over-aggressive automated fraud detection that would cut off people's accounts with little recourse. Braintree also was an early believer that mobile commerce would happen more swiftly than anyone expected and needed new payment tools and experiences.

While PayPal's failures helped shape the opening in the market for Braintree, Braintree's success also made PayPal suck less. As Marcus told me a few months ago, the existence of Braintree was a wake-up call to how complacent PayPal had become. It had indirectly helped make PayPal stronger. Now it will directly help make PayPal stronger.

In a conversation this morning, Marcus noted specifically Braintree's brand among developers and innovation around frictionless, seamless mobile payments. "You don't have to be an oracle to see that the bulk of the payment volume will eventually go mobile," he says.

I asked if that's why PayPal was buying Braintree instead of other often-named PayPal spoilers Square and Stripe, or whether Braintree was just the one who said yes. "Are we such a difficult bride?" Marcus said laughing. I quoted back what his business partner at Zong told me a few months ago of their own deal with PayPal: "No one starts a company to sell to PayPal." That may be true, but at least Ready is selling to a PayPal where entrepreneurs and techies are running things once again. Indeed, when Marcus first took over, Ready was one of the first to tell me he thought it was a brilliant move by eBay CEO John Donahoe, even if potentially a negative for would-be spoilers like him.

The plan is -- astoundingly -- for Braintree to continue to operate separately. Developers love the white glove attention and customer service, and Marcus doesn't want to mess with that. "We want to accelerate what Braintree is doing and not slow them down," he says. "We have to be -- together -- the payments provider for the disrupters like Airbnb and Uber, because those are the companies that are creating the future."

Adds Ready, "We want to be able to look our customers in the eye and tell them our tools and APIs won't change and will in fact get built upon and propelled into the future even faster."

I get all that. But keeping Braintree distinct could present just as challenging optics. I get Marcus doesn't want to break what he's bought. But in positioning Braintree as the payments brand you work with if you're a surging company like Uber or Fab, doesn't he implicitly throw PayPal under the bus? They are essentially selling the same service -- digital payments. What are PayPal customers -- chopped liver? Is the distinction between startups and small businesses? These are tricky optics the combined entity will have to figure out.

That said, I applaud Marcus for yet another bold move that's sure to be seen as a coup by the people inside the company who like the direction he's going, and a threat by those who thought there was never a problem with PayPal to begin with.

Eighteen months ago, we speculated that Braintree was one of a few companies that could realistically become the next PayPal. What I underestimated at the time was that Donahoe would hire his own entrepreneur to take on that challenge too: David Marcus.

[Image courtesy Kim White]